Protect your acquisition with a structured review of backlog quality, licensing, bonding, financials, and owner dependency before you close.
Acquiring a general contracting firm in the $1M–$5M revenue range requires scrutiny well beyond standard financial review. Project-based revenue, thin margins, retainage balances, license portability, and bonding capacity all create deal-specific risks that generic due diligence frameworks miss. This checklist covers the five most critical areas buyers must investigate before signing a purchase agreement on a general contracting business.
Assess true earnings power by normalizing owner compensation, project-level costs, and non-recurring items across at least three years of financials.
Review three years of P&L statements with job costing detail by project.
Job-level margins reveal whether profitability is consistent or driven by one-time favorable contracts.
Red flag: No project-level job costing exists — owner cannot explain gross margin by project type.
Normalize owner compensation, personal expenses, and one-time charges.
Construction owner-operators frequently run personal vehicles, insurance, and family payroll through the business.
Red flag: Addbacks exceed 30% of stated EBITDA with no supporting documentation or receipts.
Analyze accounts receivable aging and outstanding retainage balances.
Stale receivables and uncollected retainage inflate working capital and may never convert to cash.
Red flag: Retainage older than 180 days represents more than 15% of total receivables.
Compare billing-in-excess versus costs-in-excess positions across active projects.
Overbilling masks cash flow problems; underbilling signals margin erosion on active contracts.
Red flag: Costs-in-excess balances are growing year-over-year with no clear project completion timeline.
Evaluate the signed project pipeline for contract enforceability, payment structure, margin predictability, and client diversity.
Request copies of all signed contracts for active and pending projects.
Verbal commitments and unsigned LOIs are not backlog — only signed contracts transfer real value.
Red flag: More than 40% of stated backlog is unsigned, verbal, or contingent on permitting approvals.
Review payment schedules, retainage provisions, and cancellation clauses in contracts.
Unfavorable retainage terms or owner-friendly cancellation rights undermine projected cash flow.
Red flag: Key contracts allow cancellation for convenience with no compensation for work in progress.
Assess client concentration across the backlog by revenue and project count.
A single developer or GC relationship driving over 30% of backlog creates dangerous pipeline risk.
Red flag: One client represents more than 35% of backlog or trailing twelve-month revenue.
Verify project margins in the backlog against historical job costing averages.
Backlog locked in at below-average margins signals competitive pressure or desperate bidding behavior.
Red flag: Backlog gross margins are more than five points below the three-year historical average.
Confirm that all licenses, bonds, and insurance policies can survive an ownership change without a gap in coverage or eligibility.
Identify the license holder and confirm transferability requirements in the state of operation.
Many states require a qualifying individual — if that person is the seller, operations may halt at close.
Red flag: Seller is the sole license qualifier with no other licensed employee on staff.
Review current bonding capacity, surety relationship, and how ownership change affects existing bonds.
Bonding is required for most commercial and public projects — a capacity gap kills revenue immediately post-close.
Red flag: Surety requires personal guarantee reset or capacity reduction upon change of ownership.
Confirm general liability, workers' comp, and completed operations tail coverage are current.
Gaps in completed operations coverage expose the buyer to claims on projects completed before acquisition.
Red flag: Completed operations tail coverage has lapses or current carrier has issued non-renewal notice.
Review claims history on all insurance policies for the past five years.
Frequent claims signal project quality issues and will increase post-acquisition insurance costs significantly.
Red flag: More than two general liability claims in five years or any open workers' comp litigation.
Determine how much of the business's value is tied to the seller personally versus transferable systems, relationships, and staff.
Map all client relationships — identify which are personal to the owner versus company-level.
Clients who follow the owner rather than the brand represent revenue that walks out at close.
Red flag: The top three clients have never communicated with anyone other than the owner.
Identify licensed project managers, field supervisors, and their willingness to stay post-close.
Losing key field leadership post-acquisition derails active projects and subcontractor coordination immediately.
Red flag: No employment agreements or retention incentives exist for any key operational personnel.
Review the owner's day-to-day involvement in estimating, bidding, and subcontractor management.
If the owner handles all bidding personally, the revenue pipeline collapses without them.
Red flag: Owner generates more than 80% of new project bids with no estimating support staff.
Evaluate subcontractor relationships — are they tied to the owner or the company entity?
Preferred subcontractor pricing and reliability often depend on personal trust built over years.
Red flag: Primary subcontractors refuse to confirm willingness to work with new ownership during diligence.
Uncover open litigation, unresolved mechanic's liens, warranty disputes, and contract claims that could become the buyer's problem post-close.
Search for open mechanic's liens filed against or by the company in all operating counties.
Unresolved liens on completed projects can trigger payment disputes that land on the new owner.
Red flag: Active liens filed by subcontractors against the seller indicate unpaid subs on completed jobs.
Review all pending and threatened litigation including subcontractor disputes and client claims.
Construction litigation is costly, time-consuming, and often surfaces after close if not disclosed upfront.
Red flag: Any undisclosed litigation discovered through third-party searches not mentioned by the seller.
Request documentation of warranty claims on projects completed in the past three years.
General contractors carry ongoing warranty exposure on completed work that transfers with asset purchases.
Red flag: Multiple unresolved warranty claims with no documented resolution plan or cost reserve.
Confirm there are no OSHA violations, stop-work orders, or regulatory citations in the past five years.
Regulatory history reflects safety culture and creates bonding and insurance complications post-close.
Red flag: Any open OSHA citations or stop-work orders on active or recently completed job sites.
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License transferability rules vary by state. In most states, the license is held by a qualifying individual rather than the business entity. If the seller is the qualifier, you must either hire a licensed qualifying agent before close, identify an existing employee who can qualify, or obtain your own license. Confirm requirements with your state's contractor licensing board during diligence — do not assume transferability without written confirmation.
Retainage is a percentage of each contract payment — typically 5–10% — withheld by the project owner until work is substantially complete and punch lists are resolved. When acquiring a general contracting business, outstanding retainage balances represent real money owed to the business but not yet collectible. Review all retainage balances by project, confirm the associated work is complete, and structure your working capital peg to account for retainage that will be collected post-close.
Most buyers of general contracting businesses prefer an asset purchase to avoid inheriting unknown liabilities, including pending liens, warranty claims, and litigation. However, an asset purchase may trigger license and bonding reassignment requirements that a stock purchase avoids. Work with a construction-experienced M&A attorney to evaluate the trade-offs in your specific state, and negotiate a holdback or escrow to cover contingent liabilities discovered post-close regardless of structure.
Start by separating signed contracts from unsigned pipeline. For signed contracts, review payment schedules, cancellation clauses, and retainage provisions. Compare the estimated gross margin on each backlogged project against the company's historical job costing averages. Identify whether any single client represents more than 30% of backlog. Finally, confirm that the projects in backlog were won through competitive bidding or referrals rather than relationships that are personal to the seller and unlikely to survive the transition.
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